PHILLIPINE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
March - April 2003
Vol. XXI No. 2
Tax effort: going down...down...*
T
he weakening of the government’s fiscal position in 2002 and 2003 underscores more than ever the urgency of arresting the undeterred contraction of the revenue effort of the national government. Since the onset of the East Asian financial crisis, revenue effort has slipped from 19.4 percent of gross domestic product (GDP) in 1997 to 15.6 percent of GDP in 2000. Although other countries in the region have likewise suffered a deterioration in their revenue efforts since the period 1997 to 1998, the decline in these countries—with the exception of Malaysia—has not been as severe as that in the Philippines (Table 1). Although nontax revenues dipped as well, the erosion of the revenue effort in the Philippines is largely due to the weakening of the tax effort similar to other countries in
ISSN 0115-9097
the region. Thus, the overall tax effort in the Philippines plummeted by 3.5 percentage points from a peak of 17.0 percent of GDP in 1997 to 13.5 percent in 2001 (Figure 1). About two-thirds of the contraction (or 2.3 percentage points of GDP) is due to the reduction in the tax revenues of the Bureau of Internal Revenue (BIR) while the remainder (or 1.2 percentage points of GDP) is attributable to the reduction in revenues of the Bureau of Customs (BOC).
Table 1. Revenue and tax effort in ASEAN countries, 1996-2000 (Percent of GDP) 1996
1997
1998
1999
2000
Indonesia
17.0
18.1
12.6
17.9
15.9
Malaysia
23.3
23.5
20.0
19.7
18.3
Thailand
19.5
18.6
16.2
16.2
16.5
Philippines
18.9
19.4
17.4
16.1
15.6
Total revenue
Collections for all the major tax groups fell relative to the GDP in 1997-2001. The biggest reductions were from import duties, excise taxes, and income taxes. For instance, tariff revenues
By Rosario G. Manasan, Ph.D. PIDS Senior Research Fellow
tumbled from 3.9 percent of GDP in 1997 to 2.6 percent of GDP in 2001 and collections from excise taxes shrank from 2.6 to 1.6 percent of GDP. Revenues from taxes on income and profits, on the other hand, fell from 6.8 percent to 6.1 percent of GDP while collections from value added and licenses went down from 2.8 to 2.4 percent of GDP during the same period (Figure 2).
What's Inside?
Tax revenues Indonesia
14.7
16.5
11.8
16.6
14.5
Malaysia
19.4
19.8
16.7
16.0
14.3
Thailand
17.6
16.5
14.2
14.0
14.3
Philippines
16.9
17.0
15.6
14.5
13.9
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While the slide in nontax revenues is largely explained by the diminution in the income ✒ 3
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Revising Economics for the next generation
16 Family planning in the anti-poverty drive
* This appeared as PIDS Policy Notes 2002-14 under the title "Explaining the decline in tax effort" by the same author.